Properties as collateral pose bad debt risks amidst current downturn

Real estate accounted for about 60% of collateral for loans at 14 banks as of end-June, up 12.7% in value against end-2021, per data collected by The Investor.

Such a high figure poses bad debt risks for the banking sector, given the ongoing slowdown in the real estate market in terms of both transaction volume and pricing.

At ACB and Sacombank, real estate accounted for 94% and 87% of the collateral, respectively, followed by Vietcombank, Techcombank, LienVietPostBank, VIB, OCB, HDBank and SeABank at between 60% and 69%. Corresponding figures for TPBank, MBBank, MSB, VPBank, and SHB were lowest at between 31% and 43%.

Though collateral for loans can be diverse, banks prefer properties, given advantages like immovability, high liquidity, and relatively stable values.

Immovability, for instance, makes it easier for banks to check, evaluate, and monitor the collateral during the course of the loan or after its term has ended.

The high liquidity of properties, thanks to the stable and long-term growth of the real estate market as well as supply scarcity, presents advantages for banks in debt collection.

Properties are also prioritized as collateral as their documents showing land or ownership rights are transparent, making the verification of owners or users pretty simple.

Bad debt risks

However, properties as collateral also pose risks to the banking industry because of the recent decline in the real estate and corporate bond markets.

As many banks provide loans equivalent to 70-85% of the book value of the properties, the decline in the prices and low liquidity can push loans into the bad debts category. Also, the sale of properties to settle bad debts is not easy.

Many cases of using collateral to collect debt take up to three years due to changes in the status quo of the properties and legal problems in construction happening on them. Besides, people are hesitant about purchasing properties pledged as bank collateral. As a result, the prices of many properties might have to be lowered by 30-50%.

Additionally, any disputes related to the properties must be handled by the court, leading to the problem of borrowers intentionally creating “wrong” disputes to prevent banks from selling the collateral.

As of July, the banking system's bad debts and doubtful debts were VND600 trillion ($24.14 billion), or 5.41% of the outstanding loans, according to State Bank of Vietnam data.

Nguyen Quoc Hung, general secretary of the Vietnam Banks Association (VNBA), said Vietnam’s problem in handling bad debts of banks is that the country is yet to establish a debt-trading market. In the post-Covid period, as the central bank’s rules on debt deferrals have expired, the pressure on bad debts and handling bad debts will mount, he said.